The year 2020 has been very negative in many aspects, especially due to the Covid-19 pandemic, which has claimed thousands of lives in the world and has caused an unprecedented economic crisis in recent history. On the other hand, for investment assets considered as a refuge, among which precious metals stand out, 2020 has been very positive, with significant revaluations, as we have already seen in previous posts. The slow recovery that the global economy is going to experience means that there are compelling reasons to continue trusting in gold as an investment asset.
Gold has undergone a significant revaluation so far in 2020, even though the stagnation of its price since the end of summer has slightly tarnished some truly spectacular figures.
Let us not forget that, at the end of last July, the metal registered its highest price in history, beating the figure reached in 2011, and that just a few days later, at the beginning of August, it registered a new all-time high, above the $2,000 an ounce .
Gold vs. Other assets
As pointed out by the British consultancy Metals Focus , historically gold maintains an inverse relationship with the stock markets, since the precious metal is considered a protection against instability in the capital markets.
Precisely, the good results obtained by the stock markets in the period 2016-2019, in the heat of a strong dollar, caused investor interest to move away from gold, which influenced its price.
Instead, since the Covid-19 pandemic broke out, gold has been trading alongside other riskier assets, and US stocks in particular.
Both gold and the S&P 500 (considered the most representative index of the real state of the US market) reached their respective all-time highs last August, before giving up part of their gains in September.
This positive correlation has been the result of a significant drop in the yields of other assets that compete with gold, such as treasury bonds. This fall has been much more pronounced in long-term US Treasury bonds, which bottomed out last September.
In an environment of historically low (and even negative) interest rates, which are going to be maintained for the next few years , as confirmed a few weeks ago by the Federal Reserve, it is not surprising that investors have resorted to other defensive assets, like precious metals .
In addition to low interest rates and low yields from other assets that gold competes with, the metal continues to attract investors due to the challenging geopolitical landscape we face, which is set to keep volatility high in the near term.
The closest focus of instability in time is the elections for the presidency of the United States , already complicated in itself, which have become even more entangled after the fierce debate between the Democratic candidate, Joe Biden, and President Donald Trump, and after learning that he has contracted Covid-19.
To this must be added the growth in the rate of coronavirus infections and the possibility of more restrictive measures being adopted in various European countries, which could aggravate the state of the economy. All this seriously worries investors.
According to Metals Focus, in this scenario, short-term volatility is likely to persist and gold will suffer during market turmoil, which tends to benefit the dollar.
However, the medium-term outlook looks very positive for gold, as everything indicates that the macroeconomic environment will continue to be in a difficult situation, which will benefit those who invest in gold.
For now, the possibility of a rapid recovery is ruled out and the monetary and fiscal measures adopted by governments and central banks will continue to be positive for precious metals, since the opportunity cost of investing in them is reduced.
To this we must add the increase in the sovereign debt of nations and the maintenance of tensions in international trade (especially if Trump is re-elected), both factors that will contribute to maintaining the good momentum of gold.
Bonds will continue to yield negatively for quite some time, so investors will continue to move away from riskier assets towards safe havens like gold.
Furthermore, in an environment like this, a large number of institutional investors are going to start looking at gold as a strategic asset and a hedge against inflation , rather than merely a short-term defensive resource.
Despite the collapse in demand in key sectors for the gold industry such as jewelry or purchases by central banks (which in August, for the first time in a year and a half, became net sellers ), the impact of the pandemic in the supply of gold from mining has been much less than expected. In fact, despite the temporary closure of numerous mines in countries such as South Africa, it is estimated that annual global production will barely contract by around 2%, to record new highs in 2021.
And production from recycling is also going to perform well in 2020 and 2021, driven by the high price of the metal.
Added to this is the fact that investment demand continues to grow, which will partially offset the drop in demand from other sectors (jewelry and industry). Gold’s dual character of safe haven asset and protection against inflation will be decisive for it to continue to be attractive to investors.